Disqualified Agreements

Disqualified agreements refer to contracts that are not legally valid because they involve parties or terms that the law does not permit. Under the Indian Contract Act, 1872, a valid contract requires certain essential elements, including competent parties and lawful objectives. When any party is legally incapable of entering into a contract, or when the subject matter of the agreement is restricted or prohibited by law, the agreement becomes disqualified. Such agreements are void ab initio, meaning they are void right from the beginning and cannot be enforced in any court.

One key reason for disqualification is lack of capacity. Parties like minors (under 18 years), persons of unsound mind (such as mentally ill individuals or those intoxicated), or persons disqualified by law (such as alien enemies, insolvents, or foreign sovereigns without permission) cannot validly enter contracts. Any agreement made with such persons is disqualified and carries no legal force.

Another reason is illegality or public policy. Agreements that involve illegal activities, such as contracts for committing a crime, fraud, or acts against public morals, are disqualified because they go against the legal framework and public interest. Even if both parties consent willingly, the law refuses to recognize or enforce such arrangements.

Additionally, statutory restrictions may disqualify certain agreements. For example, agreements that violate specific statutory provisions like gambling laws, foreign exchange regulations, or securities laws are automatically void and unenforceable.

The law seeks to protect minors from exploitation due to their lack of mature judgment:

1. Agreements with Minors

Minors, under Indian law, are individuals below the age of 18. According to Section 11 of the Indian Contract Act, a minor is not competent to enter into a contract because they lack mature judgment and legal capacity. Any agreement with a minor is void ab initio (void from the beginning), meaning it has no legal effect and cannot be enforced in court.

The law aims to protect minors from exploitation, recognizing that they may not fully understand the implications of a contractual agreement. Even if the minor misrepresents their age, the contract remains void, and the minor cannot be held liable. This rule shields minors from financial and legal harm due to their immature decisions. However, minors can be beneficiaries of contracts (i.e., they can receive benefits or gifts), and contracts made by guardians on behalf of minors are valid if they serve the minor’s benefit.

Example: If a minor borrows money or purchases a car, the lender or seller cannot enforce payment or recovery because the agreement is void.

2. Agreements with Persons of Unsound Mind

Persons of unsound mind include lunatics, idiots, mentally ill individuals, or anyone temporarily incapable of understanding contract terms, such as those intoxicated. The key legal principle is that a party must be able to understand the nature and consequences of the agreement at the time of contracting.

According to Section 12 of the Indian Contract Act, if a person is of unsound mind at the time of making the contract, the agreement is void. However, if such a person enters a contract during a lucid interval (a temporary period of mental clarity), the contract is valid. Similarly, if a normally sane person temporarily loses understanding (due to intoxication or illness), they are treated as unsound for that period, and any contract made then is void.

This provision protects individuals who cannot appreciate the contractual obligations they’re taking on. However, it’s important to prove the unsoundness at the exact time of agreement, or the contract may stand as valid.

Example: If a person signs a property sale deed while mentally disturbed, that agreement is void.

3. Agreements by Disqualified Persons by Law

Apart from minors and unsound persons, certain individuals are disqualified from contracting by law. This includes:

• Alien enemies: A citizen of a country at war with India cannot legally enter contracts with Indian citizens without government permission.

• Insolvents: Once declared insolvent, a person’s property is controlled by an official receiver or assignee, and they cannot enter new contracts regarding their assets.

• Convicts: A person undergoing a prison sentence is disqualified from making contracts during imprisonment, though their capacity revives after release.

• Foreign sovereigns and diplomats: These individuals can enter contracts in India only with prior approval from the Indian government.

Agreements made in violation of these disqualifications are void because the law explicitly bars such persons from contracting. This preserves national security, upholds judicial orders, and respects diplomatic protocols.

Example: An agreement made by a bankrupt businessman to sell off his remaining assets is void, as his estate is under the court’s control.

4. Agreements Against Public Policy

Public policy refers to the set of legal principles designed to preserve public welfare, morality, and social order. Any agreement that undermines these values is void, even if the terms are agreed upon by both parties. Courts will not enforce contracts that:

• Promote illegal acts, such as committing a crime or fraud

• Restrain legal proceedings, such as preventing someone from filing a lawsuit

• Interfere with marital obligations, such as contracts encouraging divorce or separation

• Restrain trade beyond reasonable limits

• Encourage immorality or corruption

Such agreements are considered harmful to the larger public good, and even if the parties are willing participants, the court will refuse to uphold them. This ensures that private contracts cannot undermine the social fabric or encourage harmful behavior.

Example: A contract between two parties to share proceeds from smuggling goods is void and cannot be enforced.

5. Statutory Disqualifications

Some agreements are void because they directly violate specific statutory provisions. This includes:

• Agreements violating foreign exchange laws: For example, contracts dealing with unapproved cross-border currency transactions under FEMA (Foreign Exchange Management Act).

• Agreements breaching securities laws: Insider trading or market manipulation agreements are void under SEBI regulations.

• Agreements related to gambling or betting: In many Indian states, wagering agreements are void, and gambling debts are not legally enforceable.

• Agreements under restricted industries: Certain sectors like defense, atomic energy, or telecommunications have controlled licensing; contracts entered without statutory approval are invalid.

Statutory disqualifications override private arrangements to ensure compliance with national laws. Even if both parties are competent and willing, they cannot create enforceable agreements that contradict legal prohibitions.

Example: A contract to invest black money in a foreign country without RBI approval is void due to violation of foreign exchange rules.